‘BRITAIN is booming!” trumpeted the Daily Mail on Wednesday, as the Bank of England’s new governor, Canadian Mark Carney, was preparing to unveil the way he proposes to run UK monetary policy. Average house prices were up nearly £10,000 in a year, according to the Halifax. New car sales had surged by 12.9 per cent in July, compared with a year earlier. And every sector of manufacturing was showing output growth, the first time that had happened since June 1992.
The Mail could barely contain itself, though its online readers seemed far from convinced. The best-rated of 413 comments were peppered with cynicism. Words such as propaganda, bullwash, and abject spin and waffle to the fore. Next morning, on the BBC’s Today programme, the new bank governor was also studiously cautious. We are, he told Evan Davis, “in the very early stages of a recovery from the weakest period on record”.
Elsewhere, he had sounded even more downbeat. “There is understandable relief that the UK economy has begun growing again,” he noted. “But there should be little satisfaction.”
Clearly, Paul Dacre, the Mail’s editor, needs to lure Carney up to his Wester Ross estate for a lesson in how much middle Britain is itching to be done with the hair shirt. If there are no deer around, Dacre could show Carney how to let doom-mongers have it with both barrels.
However, the governor is right to be cautious. Two successive quarters of modest GDP growth still leave output well below where it was before the crash. We’re still climbing out of a very deep hole. Not shooting for a new set of stars. And it’s not at all clear that, having found ourselves in the grubber because of one unsustainable property boom, anyone should be advocating bringing on another one.
Yet that risk is already crystallising. Since that Halifax survey, it’s emerged that a lot of the growing housing demand is from buy-to-let purchasers rather than those struggling to get on the home ownership ladder for the first time. Some of the UK government’s Funding for Lending scheme is allowing banks to offer cheaper buy-to-let mortgages. Lending to landlords and would-be landlords has already topped £5 billion in the past three months and is heading for levels last seen in 2005, as the property bubble was inflating.
Carney’s own big innovation – forward guidance – now reassures markets that the official bank rate can be expected to remain at a rock-bottom 0.5 per cent until unemployment falls to 7 per cent, a process that could take, in the Bank’s current view, until 2016. No early relief for savers then. It’s already difficult to find a savings product that pays above the rate of inflation unless you tie up your money for years. With years more of that stark reality in prospect, the yield attractions of buying a property or two to let are growing.
But older, affluent sections of the population will be competing for houses to let with younger buyers looking for a home, assisted by Chancellor George Osborne’s Help to Buy scheme. Unless the supply of housing is transformed, we may end up with another housing bubble in the making, one that, conveniently, might only burst the other side of the 2015 general election.
Mark Carney’s approach to monetary policy has been hailed, in some quarters, as virtually sealing a Tory victory in that May poll. Despite the years of austerity, years more of cheap money will not only put the housing market back on its feet, they will reinforce the tentative recovery in output already seen between October and March. If not another boom, at least enough of a feel-good factor after the squeeze on living standards to reward, however reluctantly, the navigators currently at the wheel.
But it is really that cut and dried? In 2010, the coalition promised austerity would result in a radical rebalancing of the UK economy. Less debt-fuelled consumption. Less government spending. More export-led growth. More business investment. It is not at all clear, more than three years into the coalition’s term in office, that rebalancing has even begun.
The latest UK trade data, out yesterday, shows our persistent deficit narrowing in June, to its lowest level since January. But it remains a deficit. Especially on manufactured goods. And the economies to which we aspire to sell more, the BRIC (Brazil, Russia, India and China) economies and other surplus economies such as those in the Middle East, have their own challenges. Brazil’s growth is as anaemic as ours. India’s growth story has also been derailed.
Even China is slowing. Its new graduates are finding it harder to secure the jobs of their dreams. The slowdown is having a wider impact, notably in Australia, where some are predicting an end to its natural resources boom. And Saudi Arabia is fretting about what the fracking revolution in the United States might do to global oil prices.
Business investment also remains subdued. Businesses large and small are still hoarding cash rather than spending it. Major supermarket groups, such as Tesco and Asda, have called a virtual halt to new, large, out-of-town stores. And when an up-and-coming rival, Waitrose, does open a new store in Helensburgh, it gets seven applicants for each of the 200 jobs. Electricity suppliers are so loath to commit to new capacity in the absence of clearer government guarantees, there’s a risk of peak demand blackouts later this decade.
Meanwhile, despite all the cuts in departmental budgets and welfare programmes, total government spending, as the Institute for Fiscal Studies has pointed out, remains “approximately frozen in real terms” right into the next parliament.
And what of the promised reduction in debt-fuelled household consumption?
No-one, not even Mark Carney, yet knows how the recent recovery in demand for cars, for household goods and devices and the rest has been financed. It takes time before millions of transactions, carried out by millions of shoppers, can be distilled into a reliable answer. He told Davis the Bank’s forecasts assume it is being paid for out of earned income. But for millions of consumers, incomes are already heavily constrained by wage freezes, higher than expected inflation, newer forms of employment insecurity – such as zero-hours contracts – and forfeited benefits.
Is it so inconceivable that, with his own forward guidance now signalling cheap money will be with us for the next three years at least, more of us might decide the only way to replace that old car, buy that new washing machine or – spare our blushes after years of doom and gloom – indulge in some wee luxury and pay for it on new credit? As with what’s happening in housing, are we being nudged back into the same bad old habits that got us all into this mess in the first place?